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Five years ago when the RBI was pushing interest rates to their lowest levels, VS Parthasarathy, the chief financial officer of the nation’s biggest tractor maker, Mahindra & Mahindra, wasn’t celebrating. Now, when the rates are climbing, he is. Parthasarathy’s reaction may appear strange. But that reveals the reality that lies beneath the popular theories that rising interest rates are bad for corporate world and falling ones are good.

The demand is a lot stronger across the spectrum. His firm made record profits, with consolidated earnings before interest, tax, depreciation and amortisation (EBITDA) margins at 16.03%, the highest since FY10. Of course, investors are bumping it up to record levels giving it a market value of Rs 112,999 crore.

When the talking heads are worried about many things, from gyrations in global financial markets to the next election, what is different that makes men like Parthasarathy upbeat?

“Five years back, the world situation was precarious with an overbearing concern on Fed tapering,” says Parthasarathy. Today, a resurgent and insulated India can take bigger challenges. Five years back, growth was faltering, inflation up and expectations were uncertain. Now, the new situation is that the growth trend line is looking up, inflation is within the expected range and corporate earnings are decent. There is hope in the economy.”

It’s the best of times and it’s the worst of times for the Indian economy. Indian economy is poised to grow at 7.5% in FY19, up from 6.7% a year earlier, and the best in two years. Corporate earnings grew 9% last fiscal, the highest in three years, and is estimated to grow 21% this year. Inflation, that was around 10% in 2012, is at 5% now. Current account deficit, the excess of imports over exports, is at 1.9% of GDP, down from 4.8% in 2012.

The buoyancy in the economy post demonetisation and the implementation of the Goods and Services Tax are reflected in indirect tax collections that’s at Rs 95,610 core in the month of June. Utility vehicle sales rose 18.45% last fiscal. Motorcycles and tractors sales are at historic highs.

“Government spending has supported the economy all this while. Now, as the economy picks up, rising demand will ensure that companies will invest more. I think corporate India is ready to get back to business,” says Dinabandhu Mohapatra, CEO, Bank of India.

One of the dominant themes for the pessimism surrounding the economy is the bad loans in the system that cripples both the state finances and ability to lend. The National Company Law Tribunal is dealing with about Rs 4 lakh crore worth of bad loans. Some of the biggest corporates that gobbled up huge amount of credit that fuelled growth – Essar Steel, Bhushan Steel, Lanco, GMR, GVK and scores of others are in financial trouble.

REDUCED LEVERAGEThe flipside is that much of the rot is out of the system now. With four years of cost cutting and reducing debt levels, the leverage in the industry is down. Corporate cash flows have improved, which raise their ability to borrow and repay.

“Companies have freed up cash flows in the last few years,” says Mahesh Patil, co-chief investment officer at Aditya Birla Sun Life, who manages Rs 70,000 crore in equity assets. “Though profit growth has been just around 5- 6%, at an operating level it has grown much quicker at 10-12%. Companies have used this to manage working capital. Lower capacity utilisation has also meant companies have not had to spend much. This along with advantages of the GST regime and lower commodity prices have helped in lowering leverage.”

Data from the rating agency Crisil based on a pool of 7,000 companies shows that the median gearing for companies is likely to fall to 1 time in fiscal ended March 2018 from 1.43 times in March 2013. This means a company which had Rs 143 of debt Rs 100 of net worth in 2013, has reduced its debt to Rs 100 now, at par with its net worth. Gearing refers to the level of a company’s debt related to its net worth, which includes equity, reserves and surplus.

Crisil said that deleveraging has been a “secular story” for the good part of corporate India’s loan book for the last 5-6 years, which has led to improvement in other credit metrics such as interest coverage. The rating agency estimates that the median interest cover will improve to 2.83 times at the fiscal year ended March 2018 from 2.36 times at the fiscal year ended March 2013. In other words, companies were paying Rs 100 of interest for every `283 of EBITDA earned in March 2018, up from Rs 100 paid for Rs 236 of EBITDA earned earlier.

“The leveraging of companies has come down without a doubt,” says Romesh Sobti, CEO at IndusInd Bank. “They are in much better shape now as a result of which the impact of a rate hike will not be as severe as it was in the last cycle. Companies have brought in more equity, sold non-core assets and reduced their debt when rates were lower, which means now they are better borrowers.”

Interest coverage ratio measures how many times over a company could pay its current interest payment with its available earnings. The lower a company’s interest coverage ratio, the more its debt expenses burden the company.

Better credit metrics mean better ratings, which give the confidence to invest in the paper issued by these companies. For example, Crisil’s credit ratio, or the ratio of upgrades to downgrades, stood at 1.67 times at the end of March 2018, up from 0.79 times in fiscal ended March 2014. There were 1,402 upgrades to 839 downgrades in FY18.

Better credit ratios mean more confidence. “This trend has been visible in two legs,” says R Sivakumar, head-fixed income at Axis MF. “In the last two years, though commodity prices have started going up, top line growth and a better credit environment have contributed to lower leverage among companies making us more confident about investing in corporate debt.”

ONCE BITTEN TWICE SHYIf one goes beyond the noise of bad loans, debt burden, the bankrupt cases, it is clear that the health of the corporate world is getting better. Many of the companies, which have come from the near-death experience, are talking prudence.

One of the survivors of the 2012’s, Naveen Jindal’s Jindal Steel & Power is a case in point. For 13 successive quarters, it reported losses, but in the last quarter of FY18, it broke through the shackles to turn in a profit. That’s not encouraging CEO Naushad Akhter Ansari to lower the guard.

“We are conscious of the fact that cost of money will be more expensive and businesses must cut down debt level, so interest costs come down,” says Ansari. “Rupee is being devalued, the balance of payments may be an issue if oil prices rise, and interest rates move up.”

Although big private projects are a bit far, bank credit, which plunged to more than a five-decade-low, is picking up. The incremental creditdeposit ratio, the proportion of new loans to new deposits, has been running high at 75%.

The much required churn in the form of promoters with less equity giving way to those with deep pockets is making the industry stronger and the fall in debt levels in the bankruptcy process is also raising hopes of prompt repayment.

Capacity is being absorbed at a quick pace and the prospects of a good monsoon and government spending in an election year could be the icing on the cake.

While debt laden ones are drowning, the animal spirits are back with the financially strong ones.